AGCO Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited results; dollars in millions except per-share data.
Business context
AGCO manufactures and distributes agricultural equipment and replacement parts. Results are cyclical and seasonal, influenced by farm income, commodity prices, weather and equipment demand. Management described global demand as historically low but stabilizing, with regional differences.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $2,165.2 | $1,995.6 | $3,792.8 | $3,554.9 |
| Gross profit | $475.4 | $427.0 | $805.7 | $741.7 |
| Gross margin | 22.0% | 21.4% | 21.2% | 20.9% |
| Operating income | $148.4 | $118.6 | $164.0 | $138.0 |
| Net income attributable to AGCO | $91.5 | $50.3 | $81.4 | $58.1 |
| Diluted EPS | $1.14 | $0.61 | $1.02 | $0.70 |
- Sales grew 8.5% in Q2 and 6.7% year to date. Acquisitions contributed $46.7 million and $90.7 million, respectively; currency translation reduced sales by $40.4 million and $53.7 million.
- Management attributed improved operating income mainly to higher sales, better gross margins and cost-reduction initiatives. Q2 operating margin was 6.9%, versus 5.9%; first-half margin was 4.3%, versus 3.9%.
- First-half operating cash flow was negative $66.4 million, compared with negative $64.6 million. Investing cash outflow was $91.5 million, including $92.3 million in capital expenditures. Cash declined to $317.8 million from $429.7 million at year-end.
- At June 30, cash was $317.8 million, current assets $3,590.4 million and current liabilities $2,359.2 million; reported working capital was $1,231.2 million. Inventories were $1,885.4 million, up from $1,514.8 million at year-end.
- Total indebtedness was $1,862.5 million, versus $1,695.4 million at year-end. The debt-to-capitalization ratio rose to 38.6% from 37.5%. AGCO reported $727.6 million of additional borrowing availability under its credit facility and said it was in covenant compliance.
- Dividends were $0.14 per share in Q2 and $0.28 per share for the first half. Finance joint ventures’ portfolio was $8.4 billion; AGCO’s first-half share of their earnings was $20.1 million, down from $24.0 million.
Changes and management commentary
Sales and operating performance strengthened overall, led by Europe/Middle East, South America and Asia/Pacific/Africa; North American sales declined amid softer demand and dealer inventory reduction. First-half tractor and combine unit sales fell approximately 4% year over year, despite higher reported sales, reflecting currency, pricing, mix and acquisitions. South American industry tractor and combine retail sales rose 36% and 28%, respectively, while Western European tractor and combine sales fell 2% and 11%.
Management cited pricing, material-cost initiatives and labor productivity as drivers of margin improvement. South American growth was partly offset by material-cost inflation and expenses related to the transition to Tier 3 emissions technology. First-half restructuring expense was $5.5 million. Stock-compensation expense rose, including $4.8 million of accelerated expense in Q1 associated with a stock award declined by the CEO.
Outlook, risks and contingencies
- For full-year 2017, management expected industry demand to be relatively flat in Europe, weaker in North America and stronger in South America. AGCO expected sales, operating income and net income to exceed 2016 levels, citing pricing, acquisitions, volume and margin improvements.
- Expected 2017 capital expenditures were $200 million to $225 million.
- Key risks include farm income and commodity prices, weather and crop conditions, raw-material and energy costs, customer credit availability, foreign exchange and interest rates, government policies, supply or production disruptions, and acquisition integration.
- AGCO had $64.6 million of guarantees related mainly to dealer and end-user financing. It also sold approximately $1.1 billion of receivables through off-balance-sheet arrangements.
- A Brazilian tax dispute concerns disallowed goodwill-amortization deductions of approximately 131.5 million reais ($39.7 million), excluding interest and penalties. AGCO contested the assessment and said it believed payment was not likely; the outcome could take years. An Australian environmental authority issued a remediation notice concerning a property previously owned by an acquired subsidiary; potential liability and cost were undetermined.
- Unrecognized tax benefits were $155.8 million at June 30. Management said remaining deferred tax assets, net of valuation allowance, were more likely than not to be realized.
Investor verification priorities
- Assess whether sales growth and margin gains persist after separating acquisition, currency, price and product-mix effects.
- Monitor working-capital and inventory levels, seasonal cash conversion, and the expected second-half cash flow.
- Review debt growth, facility availability, covenant headroom and the cost and maturity profile of borrowings.
- Track regional demand and dealer inventories against the full-year outlook, as well as the planned capital-spending range.
- Follow the Brazilian tax appeal and Australian remediation notice, including any changes in estimated exposure or disclosures.